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Home > Home Insurance News > Know the Three Most Important Questions to Ask Your Insurer
Know the Three Most Important Questions to Ask Your Insurer
I.I.I. Provides Tips to Make Sure That Your Home is Not Underinsured
NEW YORK, September 6, 2005—For many people, their home is their most valuable asset. To protect their investment, homeowners should make sure their insurance is updated regularly to include improvements, major purchases and increased rebuilding costs, according to the Insurance Information Institute (I.I.I.).
“Hurricane Katrina and other recent disasters are a reminder that homeowners should contact their insurance agent or company representative at least once a year to make sure that their insurance is up-to-date,” says Jeanne M. Salvatore, I.I.I. senior vice president, public affairs. “A major alteration or addition to your home or lifestyle change such as a marriage or an elderly parent moving in with family heirlooms should also trigger a call to your insurance company.”
According to the U.S. Census Bureau, homeowners spent over $11.8 billion on additions, $82.3 billion on alterations and $28 billion on maintenance and repairs in 2004.
“Over the last several years, homeowners have taken advantage of record low interest rates to upgrade their kitchens and bathrooms, and add rooms to their homes,” said Salvatore. “If these improvements are not properly insured, homeowners can find themselves underinsured in the event of a fire, hurricane or other major disaster.”
The cost of building or repairing a home has also increased dramatically. In fact, the cost of lumber alone increased 17 percent from 2003 to 2004, according to statistics from the U.S. Department of Labor. Such costs will continue to rise as rebuilding following Hurricane Katrina gets underway.
To properly insure your home, the I.I.I. suggests that as part of your annual insurance review, you ask your agent or company representative three key questions:
Do I have enough insurance to rebuild my home?
Do I have enough insurance to replace all of my possessions?
Do I have enough insurance to protect my assets?
Breaking out a home insurance policy into the three essential areas of coverage—the house, your possessions and liability to others—makes it easier to obtain the appropriate coverage.
1. Do I have enough insurance to rebuild my home?
To accomplish this goal, your policy needs to cover the cost of rebuilding your home at current construction costs. Unfortunately, some homeowners simply purchase enough insurance protection to satisfy their mortgage lender. Others confuse the real-estate value of their home with what it would cost to rebuild it. Quite simply, you should have enough insurance to rebuild your home in the event that it is completely destroyed. In your discussion with your agent or company representative be sure to consider the following:
Replacement Cost
Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality.
Guaranteed or Extended Replacement Cost
This type of policy provides additional insurance coverage over what it would cost to rebuild your home. It can be useful if there is a widespread disaster that pushes up the cost of building materials and labor. A guaranteed replacement cost policy would pay to rebuild your home regardless of cost. Increasingly, however, insurers are offering extended replacement cost policies, which provide additional coverage of 20 percent or more over the limits in your policy.
Inflation Guard
This coverage automatically adjusts the rebuilding costs of your home to reflect changes in construction costs. Find out if your policy includes this coverage or if you have to purchase it separately.
Building Code Upgrades
If your home is badly damaged, you may be required to rebuild it to meet new (and sometimes tougher) building codes. Many insurers offer ordinance or law coverage that pays a specific amount toward these costs.
Water Back-Up
This insures your property for damage by the back-up of sewers or drains. Most insurers offer this coverage as an add-on to a standard policy.
Flood/Earthquake Insurance
Standard home insurance policies provide coverage for disasters such as fire, lightning, hurricanes and winter-related damage such as burst pipes. They do not include coverage for earthquake or flood, including flooding from a hurricane. Flood insurance is available through the federal government’s National Flood Insurance Program, but you purchase it from the same agent or company representative who provides your home or renters insurance. Earthquake insurance is available through private insurance companies or, in California, through the California Earthquake Authority. Contact your agent or company representative about purchasing flood and/or earthquake coverage.
2. Do I have enough insurance to replace all of my possessions?
Most homeowners insurance policies provide coverage for your personal possessions for approximately 50 percent to 70 percent of the amount of insurance you have on the structure of your home. This means that if you have $100,000 worth of coverage on the structure of your home, you would be covered for $50,000 to $70,000 worth of personal items.
The best way to determine if this is enough coverage is to conduct a home inventory. This is a detailed list of everything you own and the estimated cost to replace these items if they are stolen or destroyed by a disaster.
You can insure your possessions in two ways: by their actual cash value or their replacement cost. Make sure you review with your agent or company representative which type of coverage is best for your particular situation.
Cash Value Policy
This pays the cost to replace your belongings minus depreciation.
Replacement Cost Policy
This would reimburse you for the cost to replace the item.
To illustrate the difference between the two types of policies, suppose, for example, a fire destroys a 10-year-old TV set in your living room. If you have a replacement cost policy for the contents of your home, the insurance company will pay to replace the TV set with a comparable new one. If you have an actual cash value policy, it will pay only a percentage of the cost of a new TV set because the TV has been used for 10 years and is worth a lot less than its original cost. Some replacement cost policies will take care of purchasing the new item and delivering it to you, others may allow you to buy it yourself. Generally, the price of replacement cost coverage is about 10 percent more than actual cash value.
3. Do I have enough insurance to protect my assets?
Sometimes standard homeowners policies, even with additional coverages, may not be sufficient to fully protect your assets. Homeowners insurance does include liability protection.
This covers you against lawsuits for bodily injury or property damage that you or family members may cause to other people. It also pays for damage caused by pets. Liability insurance pays for both the cost of defending you in court and for any damages a court rules you must pay—up to the limits of your policy. Most homeowners insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available.
It is important to purchase enough liability insurance to protect your assets. If the standard liability covereage in your homeowners policy is not sufficient, you should review with your agent or representative whether you need an excess liability or umbrella policy. These would provide additional coverage over and above what is covered in your home (and auto) insurance policy.
The Insurance Information Institute is a non-profit, communications organization supported by the property/casualty insurance business.
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